Final answer:
The term of the bond is approximately 18 years when calculated using the present value formula and considering the given annual coupon payment, purchase price, redemption value, and yield rate.
Step-by-step explanation:
To determine the term of the bond, we need to find the number of years needed for the bond purchased at $114.63 to be worth $104 at redemption, considering the 5% annual coupons and a 4% annual effective yield rate.
First, the annual coupon payment is 5% of $100, which is $5. Since Linda’s purchase price is $114.63 and the bond will be redeemed at $104, the present value of the bond's redemption and coupon payments should equal the purchase price. Using the present value formula for bonds: PV = C * (1 - (1 + r)^(-n))/r + FV/(1 + r)^n, where C is the annual coupon payment, r is the yield rate, n is the number of years to maturity, and FV is the redemption value.
Solving this equation for n using the given numbers (PV = $114.63, C = $5, r = 0.04, FV = $104), we find that the term of the bond is approximately 18 years.